An Effective Classified Balance Sheet: Guide to Preparing

A classified balance sheet is a financial statement that presents a company's financial position. In fact, it is an essential tool for investors, creditors, and analysts to evaluate a company's financial health and performance. This article by Viindoo Enterprise Management Software aims to provide a comprehensive guide to understanding and creating the classified balance sheet.

What is a Classified Balance Sheet?

A classified balance sheet is a balance sheet that separates a company's assets and liabilities into current and non-current categories. The current assets and liabilities represent items that are expected to be converted into cash or paid within a year, while the non-current assets and liabilities represent items that are expected to last longer than a year. The purpose of classifying these items is to provide a more accurate and useful picture of a company's financial health and liquidity.

What is a classified balance sheet?

The difference between a classified balance sheet and a standard balance sheet in accounting is the way you categorize financial metrics under your assets, liabilities, and equity. A classified balance sheet separates the assets and liabilities into current and non-current categories while the balance sheet does not. Therefore, a classified balance sheet helps provide a better understanding of the composition of the assets and liabilities.

Components of a Classified Balance Sheet

The classified balance sheet has three main components: assets, liabilities, and equity. Viindoo provides below a breakdown of each component:

What are the components of classified balance sheets?

• Assets: Assets are what a company owns and include items like cash, accounts receivable, inventory, property, and equipment. These assets are further classified into current and non-current assets.
• • Current assets include items that can be converted to cash or used up within a year. Examples of current assets are cash, accounts receivable, inventory, and prepaid expenses. 
  • Non-current assets include items that will last longer than a year, such as property, equipment, and investments.
• Liabilities: Liabilities are what a company owes to others, such as creditors or suppliers. They include items like accounts payable, loans, and mortgages. These liabilities are also classified into current and non-current liabilities.
• • Current liabilities are items that a company needs to pay within a year, such as accounts payable, short-term loans, and taxes payable. 
  • Non-current liabilities are items that will be due after a year, such as long-term loans and mortgages.
• Equity: Equity represents the portion of the company that belongs to the owners. It includes items such as common stock, retained earnings, and dividends paid.
  

Advantages of a Classified Balance Sheet

This type of balance sheet provides several advantages over an unclassified balance sheet, including providing a clear view of a company's financial health, helping investors and creditors make informed decisions, and facilitating financial analysis and comparisons.

Better understanding of company's liquidity

A classified balance sheet provides a better understanding of a company's liquidity by separating current and long-term assets and liabilities. Current assets are those that can be converted into cash within one year, while long-term assets are those with a useful life of more than one year.

Similarly, current liabilities are obligations that must be paid within one year, while long-term liabilities have a repayment period of more than one year. By separating these items, the classified balance sheet provides a better understanding of a company's ability to meet its short-term obligations.

Classified balance sheets help clarify a company's financial health

Improved assessment of company's solvency

Solvency is a company's ability to pay its debts when they become due. A classified balance sheet provides a better assessment of a company's solvency by separating current and long-term liabilities. By doing so, it shows the portion of a company's debts that will need to be repaid within one year and those that can be paid over a longer period. This information is critical for creditors and investors when evaluating a company's risk profile.

Better comparison with industry standards

A classified balance sheet allows for better comparison with industry standards. Different industries have varying levels of liquidity and solvency requirements. By separating current and long-term assets and liabilities, a company's financial statements can be compared to those of other companies in the same industry. This comparison is useful when analyzing a company's financial health relative to its peers.

Help investors and creditors to make informed decisions

Another advantage of this balance sheet is that it helps investors and creditors make informed decisions. Investors and creditors can assess the risks associated with investing or lending to a particular company when they have a clear view of all financial transactions. 
For example, a company with a high proportion of long-term debt on its balance sheet may be considered riskier than a company with a lower proportion of debt.

Businesses can easily facilitate financial analysis and comparisons

Guide on how to prepare a classified balance sheet

Businesses can refer to the information provided by Viindoo here to create an efficient classified balance sheet that can accurately reflect the company's financial health.

• Step 1: List all the company's assets

The first step in preparing a classified balance sheet is to list all the company's assets. Assets can be classified as current assets or long-term assets. Current assets are assets that are expected to be converted into cash within a year, while long-term assets are assets that are expected to be held for more than a year. Some common examples of assets include cash, accounts receivable, inventory, investments, and property, plant, and equipment.

List all assets of the company is the first step to preparing classified balance sheets

• Step 2: Categorize assets

Once all the assets have been listed, they must be categorized as either current assets or long-term assets. Current assets should be listed first, followed by long-term assets. This categorization helps investors and creditors to better understand a company's liquidity and financial health.

• Step 3: List all the company's liabilities

The next step in preparing a classified balance sheet is to list all the company's liabilities. Liabilities can be classified as current liabilities or long-term liabilities. Current liabilities are liabilities that are expected to be paid within a year, while long-term liabilities are liabilities that are not due within a year. Some common examples of liabilities include accounts payable, loans payable, and notes payable.

• Step 4: Categorize liabilities

Once all the liabilities have been listed, they must be categorized as either current liabilities or long-term liabilities. Current liabilities should be listed first, followed by long-term liabilities. This categorization helps investors and creditors to better understand a company's ability to meet its short-term obligations.

• Step 5: Calculate equity

The final step in preparing a classified balance sheet is to calculate equity. Equity represents the residual interest in the assets of a company after deducting liabilities. Equity can be further classified into two categories: common stock and retained earnings.

Calculating equity is needed in preparing classified balance sheets 

• Step 6: Format the classified balance sheet

Once all the assets, liabilities, and equity have been listed and categorized, the classified balance sheet can be formatted. The format typically consists of three main sections: assets, liabilities, and equity. Current assets should be listed first, followed by long-term assets. Current liabilities should be listed first, followed by long-term liabilities. Equity should be listed last.

Viindoo Accounting Software for an effective classified balance sheet creation

Viindoo Accounting system software is powered by Viindoo, a business that specializes in providing comprehensive digital transformation solutions to SMEs. The software streamlines accounting and financial work through the use of automated processes, assisting managers in keeping abreast of financial developments. With Viindoo Accounting software, businesses can conveniently prepare a classified balance sheet. Outstanding features of the software are:

• Save a significant amount of time and effort compared to preparing the balance sheet manually. 
• Help reduce errors and ensure accuracy with easy operating features.
• Facilitate financial analysis and comparisons with an intuitive report view in the form of lists, charts, etc.
• Provide real-time financial insights and updates. Cash on Balance Sheet: Definition and Strategy for Management

FAQs

To conclude, companies should consider using a classified balance sheet as part of their financial reporting process to provide investors, creditors, and analysts with a more detailed and accurate picture of their financial position. Hopefully, this article by Viindoo provides businesses with a meaningful understanding of this concept and know-how to effectively hold cash on the balance sheet.

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